IMS Health Q3 2006 Earnings Call Transcript

IMS Health, Inc. (RX)
Q3 2006 Earnings Call
October 18, 2006, 5:00 pm ET

Executives

Darcie Peck - Vice President of Investor Relations
Dave Carlucci - Chairman and Chief Executive Officer
Leslye Katz - Vice President and Controller
Gilles Pajot - Executive Vice President and President of Global Business Management

Analysts

Larry Marsh - Lehman Brothers
John Kreger - William Blair
Steve Unger - Bear Stearns
Duane Pfennigwerth - Raymond James
Eric Coldwell - Robert W. Baird Incorporated
Asher Dewhurst - FBR
Alex Alvarez - Goldman Sachs

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the IMS Health Third Quarter 2006 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, October 18, 2006.

I would now like to turn the conference over to Ms. Darcie Peck, Vice President of Investor Relations. Please go ahead ma'am.

Darcie Peck

Thanks Taylor and good afternoon everyone. Welcome to our third quarter 2006 earnings conference call. With me today are Dave Carlucci, our Chief Executive Officer and Chairman; Leslye Katz, our Vice President and Controller; and Gilles Pajot, our Executive Vice President and President of our Global Business Management. Dave and Leslye will discuss highlights from our third quarter 2006 results and discuss our guidance for the full year. We have posted slides with the highlights of our results on our website and I encourage you to view these during Dave and Leslye's prepared remarks this afternoon. And obviously, a question-and-answer session will follow these prepared remarks.

As a standard procedure, let me read our Safe Harbor provision. Certain statements we make today are forward-looking within the meanings of the U.S. Federal Securities laws. These statements include certain projections regarding the trends in our business, future events and future financial performance. We'd like to caution you that these statements are just predictions and the actual event or results may differ. They can be affected by inaccurate assumptions or by known or unknown risks or uncertainties consequently no forward-looking statement can be guaranteed.

We call your attention to our third quarter 2006 earnings release issued earlier today, and our 2005 annual report on Form 10-K, which sets forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. All forward-looking statements represent our views only as of the date they are made and the company undertakes no obligation to correct or update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Certain of the financials measures we'll talk about today are on an adjusted non-GAAP basis. Detailed reconciliations to results on a US GAAP reported basis is in our press release, and I encourage investors to review the note in our press release further describing our adjusted non-GAAP measures.

As in the past our guidance today excludes certain item such as the ones Leslye will describe in our third quarter results, because we feel this is a more reliable way to give you guidance on our core operational performances. So, with that now, let me turn the call over to Dave Carlucci, Dave?

Dave Carlucci

Thank you, Darcie. Good afternoon everyone and thank you all for joining us. As you have seen in our press release, we had another great quarter with double-digit performances across the board. For the third quarter revenue is up 12% as reported and 10% constant dollar. And before stock-based compensation expense, operating income is up 12%, both as reported and constant dollar. Operating margin is 26% consistent with last year and adjusted EPS is $0.39, up 15%.

Our year-to-date performance is very strong and this makes 19 quarters in a row in which we have made our earnings guidance. In terms of the full year outlook, we expect revenue growth to come in toward the lower end of our full year guidance, largely because we are spending less then expected on acquisitions this year.

However, we see EPS coming in toward the top-half of our full year guidance range due to strong margin performance. In a few minutes I will have our Controller and acting CFO, Leslye Katz, take you through our quarterly results in detail.

But first I would like to talk about the factors driving the strong delivery and consistent financial results in our business. It starts with the diversity and breadth of our business. We serve over 3000 pharmaceutical and biotech companies, government agencies and other healthcare organizations in more than a 100 countries. No single client makes up more than 6% of our revenue. We source our information from over 42,000 data suppliers around the globe; that’s up from about 29,000 suppliers just a few years ago.

Added to that foundation are over 7000 IMS associates who bring market expertise, analytical skills and therapeutic class knowledge to our clients. There is no other company in the world that comes close to matching these capabilities.

In addition there are tremendous forces reshaping today's healthcare marketplace, creating challenges for our clients. Our ability to anticipate and capitalize on these trends is unique to IMS and continues to drive our growth.

Let me highlight four of these trends which illustrate the unique value IMS provides to our clients. First, the proliferation of specialized medicines and channels; second, the growth of the generic sector; third, the strength of emerging markets; and fourth, the increasing globalization of our clients' businesses. While the global pharma market growth overall has slowed to just over 6% year-over-year, we are seeing significantly higher growth rates in specialist therapy areas like oncology and diabetes and in biologic products.

Oncology sales, for example, are approaching 35 billion and currently growing at an annualized rate of 22%, which is more than three times faster than the global pharma growth rate as a whole. We've been building expertise in this area, adding both information assets and clinical expertise. For examples this quarter we announced a multi-year alliance with IntrinsiQ, a leading oncology data provider. The combination of these information assets with our analytics and consulting capabilities enable us to deliver a total end-to-end solution to our clients and strengthen our position in the US oncology market, which makes up 40% of the global market. It also enables us to deliver an integrated, clinically-rich oncology solution across seven major markets. We'll be launching this offering which we call Oncology Analyzer over the next several months and only IMS brings this level of expansive insights into the fastest growing dynamic market of oncology.

And our investments are paying off. We work with nine of the top ten leading pharmaceutical companies in oncology and have engagements with many smaller clients who are poised for future leadership in this area. We've worked with almost 140 engagements in the last 18 months across all major markets. Our services are being used in nine out of ten oncology brands in the market today, and our consulting engagements in this area are larger and broader, often spanning multiple practice areas. For example, we have a multi-million dollar engagement with a global client involving 19 distinct projects across 16 countries in multiple oncology brands. This is an exciting win for IMS because it spans a full range of our consulting practice areas from pricing and reimbursement through performance management. This client clearly recognized the scope of our consulting insights and the advantage of our global reach.

Because we can offer our clients a full spectrum of oncology solutions, our relevance is much greater to the biotech sector where half of the active oncology pipeline resides and has significantly improved our positioning in biotech. Of course the cost of therapy can be extremely high in these innovative specialty drug areas and regulators and payors are increasingly requiring evidence of clinical value, safety and economic value for each drug as a requirement for pricing and reimbursement.

IMS now has the largest staff of health economics and outcomes research experts in the industry who have access to our information covering over 77 million anonymized patient clients.

We have several large consulting engagements in HEOR. One of these involves developing a multi-country cost effectiveness model for a cancer drug that can be adapted to six European markets. Our ability to provide both global and local HEOR consulting expertise proved to be the winning combination with this client. So our ability to address the growth of specialized medicines and channels has clearly been a factor contributing to our strong performance.

The second trend that we are addressing is the growth in the generics sector. In this area, we are responding with a program of innovative capabilities that will reset the standards of market measurements in the generics arena. For example, our MIDAS market segmentation offering is a new global standard for measuring the generics market and understanding the impact of patent expirations on market opportunities across key countries. We are planning a broad release of this product next month.

While MIDAS is a global offering in the U.S., our next generation prescription services initiative has been a significant focus for us over the past three years. NGPS sets a new standard of market measurement across multiple dimensions including specialty products and channels and also delivers faster insights through weekly delivery of prescription measures. Several of our largest clients have already begun to integrate the new NGPS capabilities into their business because they recognize the immediate value of faster, more precise market intelligence. In fact, we recently had a multi-million dollar five-year competitive win back in the U.S. The client switched to IMS because of the weekly insights enabled through NGPS.

While this is extremely important to our core pharma clients, those of who you who use IMS information in your financial analysis will also realize the benefits of our NGPS investment when we deliver our enhanced National Prescription Audit service launched in January of 2007. Our financial clients will have an opportunity later this quarter to preview this compelling new source of market intelligence.

The third trend I want to touch on today is emerging markets. Pharma growth in emerging markets is growing 13% this year, almost twice the rate of the overall market. Emerging markets accounted for 31% of the absolute growth in pharma in 2005 and that’s up from just 6% in 2003, this is a huge change, and we have had established businesses in these markets for several years. Our emerging markets growth rates are significantly higher than the overall growth rate of IMS and we continue to invest in these countries,

And finally, the fourth trend that is fuelling our growth is the globalization of our client's business operations. For example, this quarter we closed on our largest global agreement ever with a top client, spanning the range of our information offerings. IMS will be the preferred supplier for all information assets including oncology, sales force effectiveness, and anonymized patients center insights at the headquarters, regional, and local levels. In addition, this agreement gives us much higher visibility to senior executives and an opportunity to expand consulting and services opportunities with them. Perhaps more importantly, this agreement will result in significant incremental spending by this client with IMS as they move towards globalization and centralization of their purchasing.

So to summarize, our strong performance is being driven by two very unique factors; the diversity and breadth of our business and the dynamic trends reshaping the market we serve. Our businesses in each of the areas I highlighted, specialty drugs, generics and emerging markets, are all growing at a rate over 20%. And finally, we are the only company who can respond to our client's needs to execute on a global basis. Our financial performance speaks for itself and we are clearly on the right track.

So with that, I will now turn the call over to Leslye Katz, our Controller and acting CFO, to take you through the details of our third quarter financial results. Leslye has been our Controller since 2001, and I am very pleased that she has stepped into the acting CFO role as we engage in our search. So, Leslye.

Leslye Katz

Thanks, Dave, and good afternoon everyone. Let me start with our press release. As part of our commitment to simplify our financial reporting, we have modified how we present our GAAP and adjusted non-GAAP results this quarter. We significantly reduced the number of tables in the press release from 13 down to 7, without reducing the amount of disclosure. Now to the results of the third quarter.

Revenue was $483 million, up 10% on a constant dollar basis, and 12% as reported. Acquisitions contributed about 1 point this quarter to our constant dollar revenue growth, with the remaining 9 points from organic growth. On the year-to-date basis, our organic revenue growth is also 9%. You may recall, we spent about $200 million on acquisitions in 2005, most of which were completed in the first half of the year. This year, we have spent about $24 million year-to-date on acquisition, and you can see from our result that our organic growth remains strong.

In terms of income, first I will cover our adjusted results before stock-based compensation expense, and then I will walk you through the impact of FAS 123R on the third quarter.

Operating income in the quarter was $124 million, up 12% on both, a constant dollar and reported basis. Our operating margin was 25.7%, up 10 basis points versus third quarter of 2005, and consistent with the objectives we have set for the business. In fact, over the last six quarters we've stabilized our operating margins at about 25%.

In Q3, we continued to invest in our consulting and services capabilities and in data assets to sustain our strong growth, and funded this investment by driving continued productivity improvements and other areas of the business, particularly in our production and development functions in Europe.

Continuing down the income statement, net interest expense in the quarter was $9.3 million, reflecting the increase in our debt level to fund the share repurchase program and higher interest rates versus Q3 2005. Other expense net in the quarter was $2.8 million. This primarily reflects foreign exchange hedging loses due to the weaker dollar against several currencies compared to start of the year. Net income for the quarter was $79 million, down 1% versus last year's third quarter; and adjusted EPS in the quarter was $0.39, up 15% year-to-year.

Now let me walk you through the impact of FAS 123R on our adjusted results. We recognized $8.5 million in cost and expense for FAS 123R in the third quarter. Of this amount, $1.5 million is in operating cost and $6.9 million is in SG&A, which matches how the employees with stock-based grants are distributed across our business. Including the impact of FAS 123R, operating income was $115 million. Operating margin including stock-based compensation expense was 24% versus 26% without this expense. This 2 point impact is right in line with our expectations for the full year.

Net income after stock-based compensation expense was $73 million and adjusted EPS including FAS 123R expense was $0.36 this quarter. So you can see we have a $0.03 impact from stock-based compensation expense this quarter. Preliminary free cash flow for the quarter was $99 million bringing year-to-date free cash flow to $179 million, up $6 million or 4% versus prior year.

On a per share basis, our year-to-date free cash flow is up 16% versus 2005. We remain confident in our full year free cash flow guidance of $265 million to $300 million. DSO was 60 days in the quarter, flat compared to the third quarter of 2005 and 2 days better than the second quarter this year. We repurchased 4.9 million shares through open market purchases this quarter at a total cost of $134 million. Year-to-date, we have repurchased 33.9 million shares for a total of $880 million. In 2006, we have returned more cash to our shareholders in the form of share repurchase than in the prior three years combined.

In the third quarter, we spent approximately $12 million to acquire two companies, and as I mentioned, we have spent $24 million on acquisitions year-to-date. Although it is hard to predict when deals will close, we do expect our full year acquisition spend to be under our historic run rate.

Turning to our business lines, sales force effectiveness, our largest business line, grew 10% on a constant dollar basis year-to-date. Portfolio optimization grew 8% constant dollar through the first three quarters. Both of these business lines are growing at the high end of our guidance range for this year. Launch, Brand, and Other grew 20% on a constant dollar basis year-to-date with accelerating performance versus second quarter. This was driven largely by strong growth in several of our Launch and Brand offerings and the rebound to double-digit revenue growth in our consumer health business in Europe.

In the third quarter, consulting and services revenue was $86 million, up 25% constant dollar. This brings the year-to-date consulting and services revenue to $248 million, up 34% constant dollar. Although, consulting and services revenue growth slowed in the third quarter as a result of our lower rate of acquisition spending, the growth organically remains well above 20%.

Now, let me turn to our regional performance in the quarter. The Americas had 8% constant dollar revenue growth in the third quarter, with essentially all of that from organic growth. This is inline with our Americas organic revenue performance in the first half of the year as well. Our Canadian business as expected rebounded to double-digit growth in the quarter as the quality issues have been stabilized.

Europe has 12% constant dollar revenue growth, and we posted another quarter of exceptional double-digit operating income growth. Asia-Pacific has 10% constant dollar revenue growth with continued double-digit growth in several of the emerging markets within this region.

Now, turning to our balance sheet; cash and equivalents totaled $148 million at the end of the third quarter, a decrease of $2 million compared with June 30, 2006. Long-term debt at September 30, totaled $1.1 billion, an increase of about $55 million compared with June 30, largely as a results of our share repurchases within the quarter.

Turning to our GAAP results; GAAP EPS for the third quarter was $0.34, $0.02 lower than our adjusted results including stock-based compensation expense. Our GAAP results shown in Table 1 of the press release include a few gains in charges which we have excluded from adjusted results. There are two main items this quarter; the first is 2.3 million due to the phasing of foreign exchange hedge gains and losses, due to weakening dollar in first three quarters, net hedge losses were generated for GAAP purposes and these losses are spread through the year in our adjusted results.

The second item is 5.5 million for the phasing of the tax rate for GAAP purposes. Significant tax benefits were realized in the first quarter from the favorable audit settlement in the U.S. This benefit is spread radically across the quarters in our adjusted results.

In summary, Q3 was another excellent quarter for IMS, with continued high single digit organic revenue growth. Operating income growth exceeded revenue growth even as we continue to invest in data assets and analytical and consulting capability. As a result, we remained confident in our full year outlook. As Dave mentioned, we expect revenue growth to come in towards the lower end of our full year guidance range, partially because our pace of acquisitions have slowed. However, given our strong margin performance, we expect adjusted EPS for the full year to be in the top half of our guidance range.

Now, let me turn the call back to Dave.

Dave Carlucci

Thanks Leslye. It was an excellent quarter. Before I turn to your questions, I want to give you an update on our legislative issue we are addressing in New Hampshire. As you know Verispan and IMS have filed a lawsuit against the state of New Hampshire, seeking to overturn the new restrictions on commercializing prescriber-identifiable data. The trial is now schedule for late January in federal court. Well, no one can predict the outcome of the trial in New Hampshire and our counsel has strongly advised against discussing any matters that may come before the court, we believe we will prevail on the merits. After all data is the language of healthcare; whether you are a research scientist, a public health official or a pharmaceutical marketing executive, you need as much data as possible at a granular level to make good decisions about therapeutic outcomes, patient safety or resource allocation.

And finally the AMA's Prescribing Data Restriction Program has been open to enrollment for over 21 weeks now and the trend is clear -- just over 4,400 physicians have signed on, less than 0.5% of the 1.4 million U.S. prescribers. So we don’t think this program will have a material impact.

So that concludes our review today. I hope we've demonstrated how IMS is consolidating our leadership position and building a platform for strong, consistent financial performance in the years ahead.

And now Leslye, Gilles and I would be happy to take your questions.

Darcie Peck

Taylor, could you open up the line for questions please.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Larry Marsh from the Lehman Brothers. Please proceed with your question sir.

Larry Marsh - Lehman Brothers

Thanks and good afternoon everyone. I just really, for Dave, wanted to get you to elaborate a little bit on the acquisition environment. You talked about the figure being a little bit below your plan for the full year, 24 million year-to-date, I guess, I want to sort of get you to talk about, what do you think the reasons for that are, is it a tougher environment, are people asking too much or is it just a matter of timing? And then previously you had said 70 to 100 million was your target there, are you being more specific in terms of quantifying what we should be looking for acquisition benefit in '06?

Dave Carlucci

Sure. Larry as you recall, we have been tracking between 50 and 100 million for a few years. Last year we did about 200 million in acquisitions. And we had said two things about '06 -- one was that we felt we had an absorption process here to integrate the significant acquisitions we made, some of which were very strategic, and in the case of PharMetrics gave us the ability to integrate our longitudinal data with our anonymized patient-level data. In addition we've been consistently building out our capabilities in health economics and outcomes research, and we just did an acquisition in that arena. But that said, as you accurately said, we thought we'd be between 70 and 100 million and we don't see ourselves getting to that this year. We do have a pipeline. We don't think we are done for the year but it's just really the deal flow -- I am not seeing any significant trends or changes in available property, it's just we've got a lot on our plates, we are moving out fairly aggressively on a number of fronts, and it's just the way it's kind of falling this year.

Larry Marsh - Lehman Brothers

Okay. And just, is it fair to say that 50 to 100 million is kind of a more normalized rate as we sort of think about in the future without being specific on '07?

Dave Carlucci

Yeah, I think so, except we've consistently said that our cash position and our balance sheet would allow us to take on something that was extremely attractive to the business that might be larger than that. And so, we wouldn’t want to preclude ourselves from taking advantage of a broader opportunity and we are not giving guidance for '07, but I think that’s been more of a historic level.

Larry Marsh - Lehman Brothers

Okay. And then just to make sure I got it correctly, are you saying what the contribution was to constant dollar revenue growth; was in the quarter from acquisitions, was it at all meaningful?

Leslye Katz

It was about 1 point.

Larry Marsh - Lehman Brothers

1 point, okay. And then just a quick follow-up and I will get off. And Les, you may have said this. Previously Nancy talked about 150 million share repurchase through the end of this year, and you are 133 million through the end of the third quarter. Are you saying you are about done for the year, or as you alluded to in the press release, still in a situation where you could be an active buyer of your stock in the fourth quarter?

Leslye Katz

As we said Larry, we bought back about $880 million of stock this year. It's unlikely at this point that we will buyback more. We do have 6 million shares still authorized and we can be opportunistic, but not likely.

Larry Marsh - Lehman Brothers

Okay, let me stop there. Thanks.

Dave Carlucci

Thank you, Larry.

Operator

Thank you. And our next question comes from the line of Mr. John Kreger from William Blair. Please proceed with your question.

John Kreger - William Blair

Thanks very much. Question for Gilles. As we head into the mid-term election and then a presidential election in a couple of years, Gilles, can you talk a bit about historically the impact that upcoming elections have had on client behavior. Do they tend to batten down the hatches and spend less on data or perhaps spend more on strategic planning?

Gilles Pajot

I guess if you look back, I don’t think the election had major impact on the market. The major impact on the market are more comings from the new products from the generalizations of the market rather than the exact market condition. But, I think a lot of people are talking about what's happening in the US if you have a different government. If you look back, you'll not find any major impact on the total market from that. And actually I could add another situation, when you're in Europe, you've basically every year in one of the major countries a change of government and overall, it has not impacted the growth.

Larry Marsh - Lehman Brothers

Great, thanks very much.

Operator

Thank you. And our next question comes from the line of Mr. Steve Unger. Please proceed with your question, sir.

Steve Unger - Bear Stearns

Hi, good evening. Quick question just in terms of the global agreement that you signed with the major pharmaceutical company. Is that the first agreement on a global scale with a preferred supplier arrangement? And is this something that you foresee yourselves trying to work through to other pharmaceutical customers?

Dave Carlucci

Well, what we had said on this subject, Steve, in the past is that we've had primarily regional level agreements. In this case, the client looked at all regions, because procurement was trying to consolidate. So, we actually negotiated these five regions on a global basis. This is the most broad and encompassing agreement we have done of that nature. And again, I have talked about this before, but I think it points to the fact that procurements activity is not necessarily a negative to our business. It is forcing a rationalization as the companies try to run their businesses more globally from an operational point of view; and frankly, I believe that's the way the pharma industry will have to trend, to be able to be more effective than efficient on a cost and expense basis. In this case it really is a win-win. I think the client had an opportunity to attack their cost and expense base, and it gave us an opportunity for a broader base of business.

Steve Unger - Bear Stearns

Great. And then is this global agreement, is this tied into the competitive win back, is it the same customer?

Dave Carlucci

No, no it's not.

Steve Unger - Bear Stearns

Okay. And then one just quick question regarding your oncology launch. What products were you using or were customers using in the -- of yours in the oncology area? And, how much more meaningful do you feel this launch will be to your business going forward?

Dave Carlucci

I think it's extremely meaningful for a couple of reasons. You can tell by my comments that we have had a breadth of capabilities around the globe. One of the things that was a bit of a hole in our offerings was a complete view of the United States market from a data point of view. So, we had a G6 offering without the largest country making up G7, so -- and it is 40% of the oncology market. So, what this allows us to do is put a complete global offering together, tie it with our consulting and services capabilities and our other offerings around the world, and then probably most significantly it marks a new go-to-market strategy for us. As you can tell by what I said, we have been able now to take our oncology capability from a therapy class point of view and spend all of our business lines and all of our consulting practice areas, and present ourselves to the client with clinical expertise, as well as a rich understanding of the therapy class.

So, I think it's indicative of where we are moving the company, that we are -- although everything we do is evidence based, it is really very, very much focused now on relevance by therapy class, which puts us to audiences that are really knowledgeable in this space. So, we believe a generalized approach, particularly in the therapy class of oncology, does not work and we are excited now about having a full portfolio of capabilities.

Steve Unger - Bear Stearns

It's great. Thank you and congratulations on a fine quarter.

Dave Carlucci

Thanks Steve.

Operator

And our next question comes from the line of Duane Pfennigwerth from Raymond James. Please proceed with your question, sir.

Duane Pfennigwerth - Raymond James

Hi, thanks. I'm wondering if you could comment on any impact potentially from some of the customer M&A that’s been going on in Europe, and I assume you've lived through some significantly -- more significant M&A in the past. Maybe just provide some anecdotes for us on what sort of favorable or unfavorable impacts you've seen from that historically?

Dave Carlucci

Sure. I'll talk a little about the past and then because Gilles spent eight years running our European operation, I'll ask him to comment on the recent acquisitions. We have always planned for acquisitions as part of our strategy since they are basically a fact of life. In the last few years, including this year, they have come in a bit below our planning estimates. And what you are seeing here is a consolidation of the mid-sized client arena, in this case Germany, over a fairly rapid period here of about 3 or 4 weeks, and really is all about consolidating their position in specialty areas and being able to drive scale and efficiency.

From our perspective, we have gotten a much stronger portfolio of capability to help clients with both their portfolio management, their sales force design and deployment, and looking across their whole business. And so we see opportunity from it but the one area that we have always had a traditional hill to overcome is in the market research database area and portfolio optimization because they combine -- if they are both using IMS they combine into one subscription, but Gilles do you want to elaborate on it?

Gilles Pajot

No. I guess, if you look at the last four mergers in Europe, they had two common goals. One was to expand geographically, basically, they are based in Europe and they've got to be in the U.S. and also access the emerging market. The second goal was to strengthen some of their therapy areas especially in the specialized -- in the specialty arena, and by the way, three of them are oncology. So what can we do for them? What we do is, yes, we lose some market research revenues, but with a new set of capabilities we can have them to expand obviously in the U.S. but also in the emerging markets. We can have them also to strengthen their franchise launching new products or re-launching products there, and finally and have them to in portfolio development to basically decide which product they are going to launch and in which country and how and which sales force. So we actually are engaged with the four of them in their merger process.

Duane Pfennigwerth - Raymond James

Great. I appreciate that color. Just one follow-up on the margins. It seems like when you initially talked about stabilization of the margin at 25%, it was before we were looking at stock options, you put up a 26% margin ex-options this quarter and what seems to me that that wouldn't be a seasonally stronger period in consulting. So is there any potential for operating margin expansion in the business if you keep, sort of, the rate of acquisition at this lower level?

Leslye Katz

I think last year, Duane, we said that we expected that our margins would remain at about that 25% level. It's going to vary a little bit quarter to quarter, but for the last six quarters we really have been running at about that 25% level. And as you heard from Dave and from Gilles, we continue to have a lot of barriers to invest in, in this business and so while we may -- if we see opportunity to expand the margin we may take it but for now we really plan to continue to execute on balanced growth. So, we can continue to invest in that wide range of opportunities we have identified.

Duane Pfennigwerth - Raymond James

Great, thanks very much.

Operator

Thank you. And our next question comes from the line of Eric Coldwell from Robert W. Baird Incorporated; please proceed with your question, sir.

Eric Coldwell - Robert W. Baird Incorporated

Thanks. Good evening, Gilles I have a question for you as well; the European Medicines Agency on October 6 put out a press release that it's increasing its forecast for drug applications this year from 61 to 91 which was a 50% increase in the expected rate and a near doubling or more than doubling year-over-year. I am curious what kind of activity you are seeing in Europe from these heavy application, sort of, abnormally large applications and is this creating any short-term or longer-term opportunities above and beyond what the company would have expected say 6 or 12 months ago?

Gilles Pajot

This is a very interesting question because it's focused on innovation and we've said there was no innovation for a while, but what you mentioned about Europe is a global trend too, and I don’t want to disclose or forecast for 2007. We are going to comment to that pretty soon, but what I can basically say that there will be more new products launched next year than we have seen the last couple of years.

Eric Coldwell - Robert W. Baird Incorporated

Right.

Gilles Pajot

So this is the results of the fact that what Dave said about specialty areas and the innovation coming through by effect, and is now paying off.

Eric Coldwell - Robert W. Baird Incorporated

If I can just follow up?

Gilles Pajot

Yes.

Eric Coldwell - Robert W. Baird Incorporated

Years ago, two, three, four years ago, the company was fairly, I am not sure what the right word is, but perhaps even obstinate that in fact the new product approvals would not have a major impact on the overall performance. That being said, the company has also made a lot of investments in new data and new services in the last two, three, four years. So, I am curious if you can give us an update on what your view point is now in terms of the impact for new approvals and then acceleration of regulatory activity.

Dave Carlucci

Yes. Let me just speak for the historic piece of it because I have been on these calls a little longer. I think the problem is when you try to draw a direct correlation between number of launches with our business results, just as the discussion takes place when a product goes generic and a fairly large revenue stream for the client falls off. These things are not light switch transactions around the launch. There are several years in advance and there are several years post. So, we have always said that a strong launch environment is good for us. We don't think that is bad, we just can't directly correlate it to business in the period, but certainly our pricing and reimbursement practice, our health economics and outcomes research business and all of the ad hocs around looking at data and analysis prior to a launch is a positive impact on our business.

Eric Coldwell - Robert W. Baird Incorporated

That's great. Thanks for allowing the follow up and nice results. Good job.

Dave Carlucci

Thanks Eric.

Operator

Thank you. And our next question comes form the line of Asher Dewhurst from FBR; please proceed with your question sir.

Asher Dewhurst - FBR

Good afternoon. Nice quarter. I would like to see if you can give me some more color in the Japan market, it's been online for about a year now or little over a year, and your slide said they had some nice operating margins, but how is the ramp up going over there?

Dave Carlucci

It's going quite well. We were just in Japan in September. What we have seen is strong uptake of the DDD offering. In fact, we are fairly close to being back to the original levels of the weekly products in terms of number of clients. However, as you know, the product was less granular. We introduced consulting and services. So, the mix is a little different. And we have a lot more opportunity to sell more therapy areas in. That’s our growth opportunity from here on versus signing significantly more clients up to the base DDD offering. So, we are pleased with the way its tracking. And we think, Japan is well positioned as that market continues to be a growth market for us and as we build out our CNS consulting and services capability.

Asher Dewhurst - FBR

Thanks. As far as the launch and brand-related revenue, it looks like you had about 20% growth and you are targeting 23% to 29%, what is it going to take over the next quarter to get up there or do you think you could hit the 23 mark?

Dave Carlucci

I'll let Leslye speak to the numbers. I can talk about some of the trends underneath it.

Leslye Katz

I think we have got a number of opportunities to continue to ramp up our growth in launch and brand. We saw it accelerate in Q2 and into Q3. We have got our Promo 360 global launch, that’s gaining traction. As Dave mentioned, our health economics outcomes research business we have been building that via acquisition; we made a very -- the acquisition in the third quarter of a health economics outcomes research company in Spain and that’s going to assist in that market growth. So, I think that we've got a number of areas, certainly what we've talked about in terms of pricing and reimbursement that will help drive growth, and as I mentioned, our consumer health business improved significantly in the third quarter and that can be another contributor going forward. So a large market out there. We have a lot of opportunity to go forward really in the early stages.

Dave Carlucci

We've always thought Asher that the launch, brand and other consists of a number of pieces and it’s the smallest of our business lines in aggregate. So if you look at SFE, sales force effectiveness and portfolio optimization that's over 75% of our business, so there is a little more variability in it. But as Leslye said, a lot of the areas that we are investing in, the Promo 360 launch, the Oncology Analyzer will be in that for the most part in Launch and Brand and of course health economics and outcomes research. So, whether we will get back to this 23% to 29% range, we will clearly be at the low end of it for the full year, it is not clear at this point but we don't have any concerns about the long-term trajectory of that business line.

Asher Dewhurst - FBR

Great, thanks. And I just missed the consulting results for the quarter, what were those, a hop off?

Dave Carlucci

Consulting was 25% growth on a constant dollar basis for the quarter.

Leslye Katz

Yeah, revenue was $86 million, so as Dave said that was up 25%, year-to-date consulting and services, $248 million, that's 34% constant dollar growth.

Asher Dewhurst - FBR

Great, thanks. Nice quarter.

Dave Carlucci

Thank you.

Operator

Thank you. And our next question comes from the line of Mr. Alex Alvarez from Goldman Sachs. Please proceed with your question, sir.

Alex Alvarez - Goldman Sachs

Good evening, it's Alex in for Chris. Following up on that last question on the consulting business, the growth there was a little slower than what we’ve seen in the past. Is this more characteristic to what we should be expecting going forward and is that decline primarily related to the anniversary of prior year acquisitions?

Dave Carlucci

Yes it is. We have said that our model is 20% to 30% growth. We knew that we weren’t going to sustain this 40% to 50% growth. But I think more importantly if you look at consulting and services through the first three quarters, about a third of the growth was through acquisitions. If you look at the third quarter of the 25% growth, only one point was acquisitions. So, I think again it is the year-to-year compare coming off of fairly aggressive acquisition year.

Alex Alvarez - Goldman Sachs

Thanks. And then just lastly, regarding your comments on the strong growth in the emerging markets business, how would you characterize the potential pool of acquisition targets that could benefit that business in the future?

Dave Carlucci

Well, I think it's very interesting. These are markets where the skills don’t exist to the level that everyone would like. This is another reason why our clients are looking to us, but we just did one, for instance, in the portfolio optimization space in Brazil, and we are looking at every turn for the opportunity to continue to fill out our capability in those markets. But, I would say there are less opportunities for acquisition in the emerging markets than we see in the mature markets, that said there still are some out there and we continue to look for ways to improve our skill sets as we did when we added our consumer health capability with the URC acquisition in China a few years ago.

Alex Alvarez

Thank you.

Darcie Peck

So, I think we have time for one more question, if there is one queued up.

Operator

Not a problem. Our final question comes from the line of Mr. Larry Marsh from Lehman Brothers. Please proceed with your question, sir.

Larry Marsh - Lehman Brothers

Okay. Well, thanks, I'll be quick. Just a couple of housekeeping items. Leslye, do you have a sense of how many options were exercised in the quarter and what we should be assuming in Q4?

Leslye Katz

We had about 1.7 million options exercised this quarter, Larry, hard to predict what will happen in Q4. We had about 1.5 in the previous quarter.

Larry Marsh - Lehman Brothers

Okay, right. And then a follow-up, you may have said this in your prepared comments, I missed it. You -- I know before Nancy talked about 40 million of interest expense for the year, it seems a little high now, are you quantifying a new number?

Leslye Katz

I think, we'll come in a little below that 40 million.

Larry Marsh - Lehman Brothers

Okay. And then finally, Dave, have you guys commented publicly about the Prescription Privacy Protection Act introduced in Congress back in July, and how that might be addressed with a lawsuit you and Verispan are filing?

Dave Carlucci

You're talking about the stark loan bill?

Larry Marsh - Lehman Brothers

Yes.

Dave Carlucci

Yeah, I mean, we've basically said that we don’t think in its introductory form that this Prescription Privacy Protection Act is going to be something that will prevail, because it's completely at odds with the post marketing requirements imposed by the FDA and the need for drug monitoring by the DEA. There is other ways to address this issue, obviously PDRP is one of them. But we think in its current form that we don't think it will be successful; and as you know, this will not be address until the '07 legislative session.

Larry Marsh - Lehman Brothers

All right. Okay. Again, would this be addressed -- is this part of something that would be addressed with a law suit that you are filing, or is that -- it's really not germane to the stark loan bill?

Dave Carlucci

I think New Hampshire us germane in any future legislation that relates to this area. So, we felt in addition to the fact that we thought it was not a strong or appropriate piece of legislation, we thought it was important to take on the issue in New Hampshire.

Larry Marsh - Lehman Brothers

Okay. Very good. Thanks, Dave.

Dave Carlucci

Thank you.

Operator

Mr. Carlucci, we have no future questions at this time. I will turn the call back over to you.

Dave Carlucci

All right. Well, I just want to thank everybody for taking the time, and we'll talk to you at the end of the year. Thanks.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you very much and have yourself a great day.

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